In the UK It works like this:
If you feel you have a greater claim to a domain name than a current holder you can submit a request for adjudication to Nominet (the national governing body for domain names). If the domain is not currently being used or clearly not displaying content relevant to the domain name or infringes on a business or trade name then they will transfer the domain to the claimant. If it is less clear there is an appeals procedure where an aribitrator helps make the correct decision.
At least that is MY understanding of how it works. Here is their full guide: http://www.nominet.o...ving-domain-disputes
I have used this process a couple of times where people have come to me to design them a new website and the previous webhost claims they own the domain name (usually to stop their customers leaving them). This usually involves them registering the domain incorrectly with their names rather than the client details - something frowned on anyway as it is a legal requirement in the UK that anyone (other than private individual websites) must be contactable via the WHOIS service so if the domain is registered to the designer or hosting company it is clear that it is being sat on to prevent someone transferring to another service.
In the US this is just blatant extortion - I have been doing some work for a local company and their .com domain had lapsed. When I went to see about registering again it is now described as a 'premium' name (it isn't it is very specific to one small 2 person firm and no use to anyone else) and they want hundreds of dollars to return it. As far as I can tell there is no way in the wild west US internet to get around this blatant ripoff scam.
The same happened to me a number of years ago - I used a domain registrar to look up the availability of carolhaynes.com - it was available (for about £15) but when I came back the next day to purchase it the price had shot up to £300. Needless to say I didn't buy it. Six months later I tried again (this time through a UK registrar) and secured it for the normal price!